Growing concern over rise in 'going concern' notices

With the economy teetering on the edge of recession and Insolvency Service
figures recording a 25% rise in the number of companies filing for bankruptcy,
it is likely that BDO Stoy
Hayward’s recent ‘going concern’ warning overSofa Workshop will be
just one of many.

ADeloitte
report has revealed that going concern warnings that a company may not be able
to continue trading appeared in the audit reports of 5% of listed companies for
the 2007/08 year. That figure is expected to rise for companies with December
year-ends.

Going concern notices scare investors and suppliers, but accountants and
company directors are required to highlight nay possibility that the company may
not be trading in 12 months time.

The Financial Reporting
Council is currently reviewing the issue of going concern notices and is
expected to issue new guidance to auditors and company directors within the next
month.

The corporate reporting watchdog is concerned that companies will start
issuing ‘boiler plate’
paragraphs which warn of exposure to economic conditions, but give little detail
on a firm’s distinct circumstances.

‘They have to write about their specific conditions, not a general
paragraph,’ says the FRC.

Steve Maslin, head of external and professional affairs atGrant Thornton,
says the full effect of the credit crisis is only just beginning to kick in and
that more company directors will need to make disclosures about things that
impact the future funding of their business than has been the case in recent
years.

‘I can’t think at the moment of a company that wouldn’t need to provide a
greater level of detail because even if a company has cash in the bank, we’ve
been going through a period when you haven’t even been sure that that money is
safe,’ he says.

Cash in the bank is one problem, but it is getting cash from the bank that’s
worrying most businesses. Many will face problems when their overdraft facility
comes up for renewal as banks may be unwilling or unable to offer the same line
of credit as they have in the past.

PricewaterhouseCoopers
director Geoff Swales reckons that the majority of going concern warnings will
come from companies that depend on bank financing.

‘Banks aren’t even willing to lend to each other at the moment,’ he says,
‘It’s a vicious circle that needs to be broken.’